Is a reverse mortgage right for you?

You and your spouse have lived in your home for 50 years. It's your safe haven, a comforting place to be, and you want to spend your remaining years in your home.

The problem is you are both retired and approaching your 70s, and between the taxes, maintenance and homeowners insurance, it's hard to keep your head above water financially.

One way is to take out a reverse mortgage, but Bill McAllister of Honesdale, a member of Pennsylvania Institute of Certified Public Accountants, said, "It is something that should be considered only after every other option has been explored."

"One retirement planning resource that has gained interest in recent years is the reverse mortgage. A reverse mortgage allows you to convert part of the equity in your home into cash," he said.

If you’re 62 or older and want money to pay for expenses, a reverse mortgage is an option. However, if you consider this route, experts from the PICPA suggested you ask your financial planner to review all the factors related to this option to help you decide if a reverse mortgage is right for you, he said.

What is a reverse mortgage

A reverse mortgage is a type of loan that allows you to cash out the equity in your home. Many seniors turn to these plans to enhance their spending money in retirement, but they may not be right for everyone, and it isn't something you should jump into without doing your due diligence, McAllister said.

Jeff Gilbert, a Thrivent Financial adviser in Stroudsburg, agreed with McAllister and added, "Now, before homeowners can sign a contract for a reverse mortgage, the financial institution must refer the homeowner to a consumer counseling service to ensure the homeowners understand what they are signing and what the financial ramifications are."

In the 1980s when reverse mortgages were first heavily marketed to seniors 62 and older, they were offered by proprietary reverse mortgage companies, and there wasn't much oversight on the companies. Many of the homeowners were not aware of their part of the contract, according to McAllister.

In other words, they weren't aware that they would pay the taxes, maintain the property and pay for the insurance on the property. When the seniors in the reverse mortgage fell behind on the taxes or insurance, the home was foreclosed, leaving the home's occupants scrambling for a roof over their heads.

Now reverse mortgages are offered via mortgage lenders through a program insured by the Federal Housing Administration, known as a Home Equity Conversion Mortgage, but it still is an option that should be taken after all other avenues have been explored, Gilbert said.

A Federal Department of Housing and Urban Development, which now insures most reverse mortgages, released a report last fall found that nearly 90,000 reverse mortgage loans held by seniors were at least 12 months behind in payment of taxes and insurance. The bottom line is one of the requirements of this type of loan is the taxes and insurance must be paid by the homeowner or the loan goes into default. Those homes would end in involuntary termination, according HUD.

Changes made

In order to stop the flow of defaults on HECM, the Federal Housing Administration has tightened requirements to reduce faults for new loans going forward. It's a necessary measure to keep the reverse mortgage portfolio, whose value can go down with defaults or if the home falls into disrepair and the property and home prices decline, said Brian Sullivan, a HUD spokesman.

Financial professionals note that reverse mortgage can be viable source for seniors who wish to access their accumulated home equity and age in place. "But only after all other options have been explored and it is the only possible way for seniors to stay in the home as long as possible or until their death," McAllister said.